Commodities | Oct 16 2006
By Greg Peel
The slowing US economy is taking its toll in the steel market, with Chinese exports only exacerbating the problem for local producers. Mittal Steel has just cut production in order to stay in line with demand. European demand is reportedly also weak.
Japan has just settled hot-rolled coil (HRC) prices at US$520t for the December quarter, which was lower than analysts were expecting. Korea is holding out for a still lower price, but Credit Suisse believes they will have to settle for US$520/t as well.
Chinese steel exports year-to-date are up 81% from the same period in 2005, while China’s apparent consumption (production + imports – exports) growth has fallen below 2% in September, notes Credit Suisse. However, CS suggests demand indicators show real Chinese demand growth for steel is running closer to 17-20%.
CS further suggests current Chinese destocking will turn into restocking in 2007, as it did in 2005. This means the West will only suffer a “soft landing” in steel markets. Merrill Lynch notes production cuts in the West will likely keep the market in balance.
For Australian steel exporter BlueScope (BSL), opinions are mixed.
Credit Suisse was factoring in a US$550/t settlement, so the lower achieved Japanese price implies a $16m profit downgrade. Earnings visibility is very poor at the moment, says CS, so it’s hard to know exactly where things are heading. However, on the longer term view CS still finds Bluescope “compelling” – hence an Outperform rating.
GSJB Were rates Bluescope Marketperform (L/T Hold) and suggests it’s hard to see a catalyst to drive near term outperformance. The FNA database shows a 3/4/2 rating (B/H/S). Average target is $7.72.